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Analyst view: Disappointing picture for hedge fund trusts

The performance of hedge funds has disappointed again, with the HFRX Global Hedge index falling by 8.1 per cent in the past 12 months. This represents 2.4 percentage points underperformance of the MSCI World index total loss of 2.4 per cent in dollars.

Gains in the net asset value of a majority of listed hedge funds outperformed the wider hedge fund sector. However, most are in negative territory. Since 2008, the sector has generally failed to deliver on investor expectations of absolute returns.

Multi-strategy fund of hedge funds (FoHFs) remain under pressure to survive. Unexciting performance means they have struggled to attract fresh demand, and the only significant buyers have been value investors who continue to apply pressure on funds to return capital. In 2011, GS Dynamic Opportunities and BlackRock Absolute Return opted for a managed wind-down. In addition, capital has been returned via tender offers/redemptions by Absolute Return Trust and Dexion Absolute (Euro), while TR Hedge + has returned a significant amount of capital via buybacks.

Many listed hedge funds face continuation votes in early 2012 triggered by their discount exceeding 5 per cent in the previous year. These tend to be a catalyst for corporate action. For instance, TR Hedge + will hold a tender for 50 per cent of share capital in March, and will also offer a full exit in 2013 if it fails to meet return targets. In advance of its February continuation vote, Alternative Investment Strategies has proposed a 10 per cent redemption in June, as well as a 10 per cent exit in March 2013 if the discount remains wider than 8 per cent.

Dexion Absolute, the largest listed FoHF, will hold continuation votes before the end of May as to whether to close each of its three currency share classes. The sterling class is likely to pass its vote and while it may not offer a redemption, it is effectively providing an exit via the smaller euro share class. Investors can convert between classes on a monthly basis, and we understand that value investors have been purchasing shares of the sterling share class and transferring into the smaller euro share class with the intention of voting against continuation and forcing a redemption.

Corporate action in the FoHF sector offers investors opportunities to exploit value. However, buying a fund for potential wind-up is complicated by the illiquid nature of portfolios and may require holding illiquid and potentially unlisted assets.

Single manager funds have tended to fare better. BH Macro has been the strongest performer with an 11.7 per cent NAV return in the last year driven by profitable interest rate trading, which benefited from volatility. BH Global, which invests in six Brevan Howard strategies, also performed well, with the NAV up 4.9 per cent. Cazenove Absolute Equity’s defensive positioning enabled it to generate NAV returns of 2.5 per cent, standing out in a period when most long/short equity funds struggled.